French R&D Tax Incentives

FRENCH R&D TAX INCENTIVES

PONT ALEXANDRE III / PARIS

Content 04 05 06 07 Eligible expenditures 08 Opportunity and securisation 09 Innovation tax credit (“CII”) 10 Innovative start-ups (“JEI”)

Research and development tax credit General approach to identify the R&D activities Determination of eligible R&D expenditures

Contact Deniz Erginay French Desk Coordinator Mobile 0534 891 62 41 e-mail: derginay@mazarsdenge.com.tr

Adress: Hürriyet Mah. Dr. Cemil Bengü Cad. Hak iş Merkezi No:1 Kat:1-2 - Çağlayan Istanbul / Turkey [03]

R&D tax credit (“CIR”) to improve the competitiveness

Research and development tax credit What is the R&D tax credit?

Definition and objectives The R&D tax credit is a tax incentive through a volume-based tax credit.

The objective of this tax incentive is to improve the competitiveness of companies by encouraging technological or scientific risk-taking.

Calculating the R&D tax credit France’s research tax credit covers 30% of all R&D expenses up to €100 million, and 5% above this threshold.

Salaries for research staff are wholly integrated, plus 50% of R&D operating costs and 75% of investments in R&D operations.

It is determined by calendar year, regardless of the closing date of the FY.

Booking the R&D tax credit The CIR is deducted from taxes due by the business.

Any remaining non-deducted CIR can be offset against taxes owed for the subsequent three years.

The unused portion of the tax credit is refunded after this period.

It is immediately refundable for SMEs (as defined in Community regulations), innovative start-ups (JEIs) and firms subject to amicable settlement or safeguard

In the future Production of a secure documentation, which would be updated annually.

[04]

General approach to identify the R&D activities

Market conditions Opportunities

Development project: New product/service/process

Does the company have any scientific or technical difficulties in carrying out its project?

Resources Company’s restrictions

NO

YES State-of-the-art Does accessible knowledge solve difficulties?

NO

YES Identification of missing knowledge Precise formulation of the scientific uncertainties/ locks blocking project implementation

R&D activities: • Fundamental/ basic research • Applied research • Experimental development • Eligible works to the R&D tax credit

[05]

No R&D Works/expenses are not eligible to the R&D tax credit

Determination of eligible R&D expenditures Research operations eligible for the tax credit are defined by the administration, in support of the Frascati Manual drawn up by the OECD, considered as the international reference for defining the scope of research and development activities.

R&D activities must be distinguished within all the activities that companies undertake to innovate. R&D activities are a subset of innovation activities. According to administrative doctrine, the fundamental criterion for distinguishing R&D from innovation expenditure in general “is the fact that an R&D project must combine a significant element of novelty with the dissipation of scientific and/or technical uncertainty. In other words, the R&D project aims to solve a problem whose solution does not seem obvious to someone who is fully aware of all the knowledge, practices and techniques commonly used in the sector concerned.

For the purposes of the research tax credit scheme, the following categories of activity are considered as scientific or technical research operations: Basic research activities Activities of a fundamental research nature are those which, in order to make a theoretical or experimental contribution to the solution of technical problems, contribute to the analysis of properties, structures, physical and natural phenomena, with a view to organizing, by means of explanatory diagrams or interpretative theories, the facts arising from such analysis.

Applied research activities Applied research activities are those aimed at identifying possible applications of the results of fundamental research or at finding new solutions that enable the company to achieve a specific objective chosen in advance. The result of applied research consists of a probatory model of the product, operation or method.

Experimental development activities Experimental development activities are those carried out by means of prototypes or pilot installations, with the aim of gathering all the information necessary to provide the technical elements of decisions, for the production of new materials, devices, products, processes, systems, services or for their substantial improvement. Substantial improvement means changes which do not result simply from the use of the state of the art in the field and which are new.

[06]

Eligible expenditures Scientific or technical research eligible for the scheme includes fundamental and applied research, as well as experimental development.

Research expenditure eligible for the tax credit includes: Tax deductible depreciation expenses relating to fixed assets, created or acquired newly, assigned to eligible R&D works/ projects, including patents acquired.

Costs relating to staff qualifying as scientists and/or engineers (staff costs relating to ‘young graduate doctors’ are retained at up to 200% during the 24 months following their hiring by the company).

Expenses resulting from outsourced R&D works/projects.

Expenses incurred for patent registration and/or in connection with the defense of patents.

Expenses relating to the monitoring of technical developments.

Premiums paid in connection with insurance contracts relating to the legal defense of patents.

Salaries for research staff are fully taken into account. Operating costs are taken into account by retaining 50% of the R&D staff costs plus 75% of the depreciation on the assets allocated to the research; Research expenditure sub-contracted to public research bodies, private research organizations approved by the minister with responsibility for research, or scientific/technical experts who have been approved under the same conditions are fully taken into account. The expenditure incurred must be for the purpose of carrying out genuine, clearly-specified R&D projects. If the company and the research body are unrelated, expenditure sub-contracted to public research bodies shall count for double of their amount.

[07]

Arc de Triomphe / Paris

OPPORTUNITY and securisation OBJECTIVES • If necessary, in order to secure the company’s CIR, documentation gathering the elements for determining the tax credit will be required.

• The supporting file must be a very precise description of the identified research work that has been carried out in a given year.

• This documentation must also be able to gather evidence of the eligibility of R&D activities/projects and declared expenditure.

SECURISATION • The control of the CIR can involve two actors: The French tax authorities alone remains competent to apply the rectification procedures.

The Ministry in charge of Research or the Regional Delegations for Research and Technology (DRRT) whose duly authorized agents have a right to verify the reality of the allocation of the expenditure taken into account to research

[08]

Innovation tax credit (“CII”) DEFINITION AND OBJECTIVES • Support scheme for innovative companies, introduced by the 2013 Finance Act, as complement the CIR • Strengthening the impact of the R&D tax credit on SMEs • Taking into account innovation expenditure carried out downstream of R&D by SMEs on prototype design activities for new products or pilot installations of the same nature.

ELIGIBLES COMPANIES • Industrial and commercial or agricultural companies, • Companies subject to a CIT real regime or exempt under regimes restrictively listed by law, and Micro, Small and Medium Enterprises (“SMEs”).

ELIGIBLE ACTIVITIES AND EXPENSES • Prototypes and pilot installation CALCULATING THE INNOVATION TAX CREDIT • Offsetting a tax credit against CIT equal to 20% of innovation expenses limited to €400,000 per year • The maximum tax credit obtained is equal to €80,000 per year BOOKING THE R&D TAX CREDIT • Similar to the R&D tax credit: Deducted from taxes due by the business, Offset of any remaining non-deducted against taxes owed for the subsequent three years, Refunded of the unused portion of the tax credit after this period, Immediately refundable for SMEs (as defined in Community regulations), innovative start-ups (JEIs) and firms subject to amicable settlement or safeguard procedure, court-ordered reorganisation or winding up.

ELIGIBLE ACTIVITIES Prototypes: • Original model with the technical qualities and operating characteristics of the new product; • Prove that the product has superior performance and meets a technical or commercial need.

Pilot installation: • Set of equipment or devices used to demonstrate, on a scale or in an environment close to industrial reality, that the new product: has superior performance and meets a technical or commercial need.

Prototype or pilot installation of a new product: Property not intended to be placed on the market Intended to be used as a model for the realization of a new product ELIGIBLE EXPENSES • Depreciation of fixed assets used to carry out prototype design operations or pilot installations for new products • Expenditure on staff assigned to carrying out operations to design prototypes or pilot installations of new products • Other operating expenses • Intellectual property expenses • Expenses outsourced to approved companies

[09]

Innovative start-ups (“JEI�)

New businesses, created until 31 December 2019, that invest in R&D and that have innovative start-up (JEI) status are eligible for exemptions from taxes and social security contributions.

[10]

To have innovative start-up status, at each financial year-end, a business must meet all the following conditions: • Be an SME; • Have been set up less than eight years ago; • Be independent (it must be a minimum of 50%-owned either by individuals or by certain firms in the venture capital sector, or by research and education institutions, or by non-profit organizations or scientific public interest foundations, etc.); • Not to have been created out of a merger, restructuring, spin-off or takeover of pre-existing businesses; • Invest an amount for research representing at least 15% of tax-deductible expenses.

New businesses with innovative start-up status are entitled to exemptions from:

Advantages: • The exemption from tax on profits can be combined with the research tax credit (CIR); • Innovative start-ups can also receive an immediate refund of their CIR receivables.

• Personal income tax or corporate income tax: - Total exemption for the first financial year or the first period when they are taxed on profits (this may not be longer than 12 months); - Followed by a 50% exemption for the next year when they post a profit.

• The local economic contribution (CET) and property tax for seven years following a decision by local government.

La tour Eiffel / Paris

[11]